EDITORIAL: Financial reform report card

When the credit bubble burst in 2008 and the world almost fell into another Great Depression, the public's anger could be distilled into two demands: that the people responsible for the calamity should be brought to justice, and that the government should act to ensure that nothing like it happened again.

The first demand was never met. Although prosecutors have obtained large civil judgments against major banks — most recently a tentative $17 billion settlement with Bank of America — no top official at a major financial institution has been convinced of a crime. It can be hard to prove an intent to commit fraud with people who deceived themselves as thoroughly as they deceived others.

The second is more of a mixed bag. Four years ago, Congress enacted a major Wall Street overhaul, known as Dodd-Frank, after its key sponsors. The law has made some significant improvements but has done little or nothing about other vulnerabilities.

With the sixth anniversary of the worst of the financial crisis approaching, here's a report card on how well — or poorly — key areas have been addressed.

Money markets: A

One of the scariest moments of the 2008 financial crisis came when a money market mutual fund "broke the buck" after Lehman Bros. failed. That small loss was enough to trigger a $300 billion stampede out of money funds and to prompt the Federal Reserve and Treasury to quell the panic by temporarily backing such funds the way it does bank accounts.

It took several years and many false starts, but the Securities and Exchange Commission finally voted last month to have money market funds rise and fall based on the value of bonds they hold, rather than trying to mimic bank accounts. This might seem like a technical matter, but it's a huge step toward preventing runs such as the one that occurred in 2008.

Consumer protection: A

The Dodd-Frank law created a new federal watchdog, the Consumer Financial Protection Bureau, to defend customers' interests in their dealings with financial companies. The CFPB's first victory was survival, as Republican lawmakers and powerful industry interests tried to gut it.

By forcing five major credit card companies to return $1.5 billion to consumers, and exposing other scams by debt collectors and payday lenders, the agency has sent a long-absent message: Financial companies can no longer rip off consumers with impunity. And its public database gives people a place to complain and get action.

'Too big to fail': C

Perhaps the best news about the financial sector is that banks have much stronger balance sheets than they did going into the crisis. This has been partly the result of the 2010 law, which ordered regulators to develop rules requiring greater liquidity and capital reserves, which provide a cushion against losses. Even so, though banks have bolstered their balance sheets under pressure, they have won delays in the implementation of most rules.

The 2010 law also made a stab at creating a process to allow major banks to fail in an orderly way. Just how this would work with banks holding trillions in assets and liabilities is anyone's guess. The law required the biggest banks to create credible "living wills," or plans for how they would wind down operations in case of looming failure. Last week, though, federal regulators rejected the plans of 11 big banks, calling them "unrealistic or inadequately supported" and giving them until July 1 to submit revised plans.

Credit rating agencies: D

Agencies such as Moody's and Standard & Poor's contributed to the financial crisis by giving AAA ratings to portfolios of toxic loans. The agencies were paid to do so by the people putting the portfolios together, a conflict of interest akin to authors hiring their own book reviewers. A few ineffectual regulations were imposed, but the bolder solution — separating the financial link between raters and sellers of securities — has gone nowhere.

Fannie Mae and Freddie Mac: F

These two "government-sponsored enterprises" grease home lending while making a tidy profit in most years by capitalizing on their government connections. They came late to the subprime mortgage party and didn't cause the credit bubble, but they did make it worse.

Even before 2008, it was obvious that changes to Fannie and Freddie were needed to limit risks to taxpayers. Many years, several proposals and one enormous financial crisis later, nothing has been done.